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majority derive less than a quarter of their total sales from international markets. Addressing these complex challenges is exacerbated by the complex operating environment confronting firms at the present time, especially related to Brexit-induced uncertainty and the wider hostile international trading environment since the election of the Trump administration in the US. What this suggests is that policymakers may have to become much more proactive to alleviate these challenges if Scotland is to overcome this export deficit and stimulate export expansion among SMEs. To achieve this, the Scottish Government may wish to further prioritise overseas internationalisation over other (often more resource-intensive) economic development initiatives such as infrastructure or flagship higher education commercialization efforts (Brown et al, 2016). The key benefit from concentrating support towards SME internationalisation owes to the fact that many externally-focused SMEs are often the most growth-focused firms which generate substantial economic benefits for local economies, most notably “jobs” (Mason and Brown, 2013).
While Scotland underperforms in terms of exporting, there also seems to be a strong recognition that the UK’s export performance as a whole underperforms relative to its European peers. In terms of longer-term strategic forms of assistance to encourage SME internationalisation, policy makers may have to implement a much more expansive and well-resourced overarching export strategy for Scotland. Indeed, the UK government is currently developing a new export strategy to build on the recent economic strategy “Building our Industrial Strategy” (BEIS, 2017). A key starting point within this work is the acknowledgement that while less than one in ten UK SMEs currently exports, almost the same number (an estimated 300,000 SMEs) have the capacity to internationalise. This would suggest that roughly 30,000 Scottish SMEs may have some kind of capacity to become internationalised. Targeting such dormant or “discouraged” exporters seems to be a highly worthwhile policy objective.
In view of the need for more firms to engage with international markets, what type of initiatives could (or should) be developed to encourage exporting, especially among SMEs? The first policy task is to motivate non-exporters (or infrequent exporters) to explore international markets. This may be easier said than done. The export challenge is especially salient for SMEs, due to challenges such as limited capital for exploring international markets (whether in terms of onsite visits or trade fairs), obtaining export market intelligence, or even securing the capital to expand production for export sales. Organisations such as Scottish Development International have been developing programmes for years on this front. Perhaps more could be done to encourage
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Fraser of Allander InstituteSMEs to take the initial foray into global markets. Export initiatives such as the TR&DE program by the former UKTI have worked in various locations to provide seed funding for SMEs to explore international markets (Kalafsky, 2017). Other development-trade organisations have encouraged (and helped to fund) SMEs to attend trade fairs as vehicles to access a wider international customer base. Regardless, taking the initial leap into international markets is an important first step.
Just as important is the need to encourage SMEs to persevere when export markets do not work out well the first time. Many firms become discouraged after initial export explorations do not turn out as planned. So in addition to helping non-exporters to export, policymakers and trade development officials could look for ways in which to support SMEs that have lower export intensities or have pulled back from international markets altogether due to previous negative experiences.
A second equally important policy challenge concerns the geographies of export markets. Simply put, are there policy-led means to catalyse firms to explore new and/or emerging markets that are not currently served by most Scottish exporters? As discussed earlier in this paper, almost one-sixth of Scottish exports are destined for the US alone, with concentrations in nearby European markets. Moreover, the data in this paper suggests that many large and/or emerging global markets receive relatively little attention from Scottish exporters. Beyond the initial jump to exporting discussed above, how do firms engage with new markets? This again is a question of supporting firms (especially SMEs) in terms of obtaining intelligence of international markets. Beyond standard prescriptions and information sources such as these, again it may entail actively motivating promising exporters to go to faraway locations. Firms can attend trade fairs located domestically or internationally to find these customers. While the trade fair solution is a possibility, it is not always within the realm of possibilities for many firms. Indeed, SMEs have cited the costs of participating in trade fairs as an impediment to exporting (Kalafsky and Duggan, 2016). While trade fairs and the like may indeed be the ‘cost of doing business’ in international space, perhaps greater levels of incentives could be offered to help leverage access into new and emerging markets.
Of course, a critical factor shaping the current exporting environment is the indeterminate nature of Brexit. Brexit is so polyvalent, pervasive, and entrenched across so many sectors it is difficult to exaggerate its potential impact. Research strongly shows that Scottish firms, especially Scottish SMEs, are deeply concerned about the potential negative impact of Brexit. Compared
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to other parts of the UK, Scottish and Northern Irish SMEs note particularly strong concerns about Brexit (Brown et al, 2018). While examining the policy implications of Brexit is well beyond the scope of this paper, what seems certain is that Brexit is likely to have a profound impact on the trading environment facing Scottish firms for years to come.
Taken in one sense, it can be (and for the most part has been) viewed as an existential threat for Scotland’s exporters in view of the fact SMEs typically engage with comparatively nearby or adjacent EU markets. In this regard, this could be problematic as there is often a considerable lead time needed to successfully engage international markets, especially those in which the firm has little or no experience. On the other hand, viewed more optimistically, it could be an opportunity for Scottish exporters. If indeed the UK is no longer joined in some sort of common market or free trade area (which is still in flux), then firms may be compelled to find new and in most cases, distant, markets. At the same time, the ‘distance’ of such markets might be manifested in various ways: cultural, regulatory, and other ways beyond mere geography. In particular, this is an area in which policy-led support could help the most in terms of gathering market intelligence and easing the difficulties of entering a market.
That said, irrespective of the outcome of the Brexit process, neighbouring EU markets will remain critical for the Scottish economy. Therefore, alleviating the negative impact of Brexit is crucial for enhancing the long-term competitiveness of many export-oriented Scottish SMEs. Positively, this has been recognised by the Scottish Government who have been one of the first devolved administrations to proactively offer a bespoke Brexit-related subsidy to SMEs exporters to the EU2.
Commendably, the Scottish Government recently created a new bespoke ministerial portfolio specifically designed to assist the development of Scotland’s wider trade-related efforts and to cultivate associated political and commercial interests overseas. This is an important step in the right direction towards nurturing a stronger policy focus on improving Scotland’s weak export performance. However, part of the problem facing policy makers is a lack of concrete evidence on how best to develop international trade. Therefore, undertaking an enquiry (similar to the famous 1990s Business Birth Rate Enquiry) around exports might be a useful step towards enhancing the evidence base around the underlying causal factors contributing to Scotland’s
2The pilot scheme launched in Scotland enables eligible SMEs a subsidy of £4,000 to assist with exporting to EU markets. Details
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Fraser of Allander Institutehistorical export underperformance. More immediately, what seems certain is that policymakers are likely to have to provide an important cushion against the arduous Brexit headwinds facing Scottish exporters, especially if the country’s weak export performance is to be improved in the years to come.